American Express Australia Submission to the Reserve Bank of Australia Regarding Review of Card Payments Regulation Issues Paper 24 April 2015 Introduction American Express appreciates the opportunity to comment on the RBA Issues Paper. Our main concern with the Issues Paper relates to the recommendations of the Financial Systems Inquiry (FSI) to: • regulate the American Express Global Network Services business; and • create a three-tiered surcharging model which particularly impacts American Express. As acknowledged by the RBA, American Express lacks market power and is a not a ‘must take’ card. This is not just an assumption. Many merchants actually make this choice, and many consumers choose not to hold an American Express card. Regulating the American Express Global Network Services business in the same way as the current Visa and MasterCard Interchange Standard would result in banks having little incentive to issue American Express cards. The argument that regulating the American Express Global Network Services business is required for the purposes of a ‘level playing field’ or for ‘competitive neutrality’ originated from our competitors. If implemented, it would place American Express at a significant competitive disadvantage, with no flexibility to differentiate our business by providing additional value to merchants and cardmembers. American Express does not support surcharging by merchants. As it lacks market power and is not a ‘must take’ card, American Express wants the ability to choose with whom it does business. If merchants choose to discriminate against American Express customers at point of sale then we should be able to choose whether to do business with them. The proposed three-tiered surcharging standard is overly complex and requires the RBA to choose a limit for the ‘medium cost’ tier which will ensure almost all merchants either under or over recover their card acceptance costs, in contrast to the current reasonable cost of acceptance Standard. Further, if American Express Global Network Services business were regulated as recommended by the FSI, merchants would face additional complexity in having to identify the type of American Express card presented, comply with different surcharging rules for each type, and then explain the difference to their customers. We expect many merchants to struggle with this complexity and either: • over-surcharge American Express cards; or • cancel accepting American Express cards altogether. If implemented in combination, these recommendations from the FSI will impair the viability of the American Express Global Network Services business in Australia and reduce competition in the credit card segment by awarding even more share to the already dominant Visa and MasterCard, who already dominate the segment with over 81% of credit card transactions by value. We do not see how this can be in the public interest. Page 2 We believe that the RBA can address any concerns it has about transparency and cross-subsidisation without introducing measures that will have a material negative impact on American Express. We have set out our reasoning in more detail in this submission. Page 3 Publishing thresholds for which payment system providers will be subject to interchange or related regulation, possibly based on transaction values and/or market shares The current system of designation and regulation is sufficient American Express believes the current system of designation and regulation under the Payment Systems (Regulation) Act is sufficient and empowers the RBA to implement targeted regulation of payments schemes when the need arises. The recommendation in the final FSI report that payment schemes be regulated in exactly the same way is misguided: it would place smaller schemes at a disadvantage as they would be unable to overcome inbuilt consumer and institutional bias in favour of entrenched dominant schemes. Regulating American Express by capping fees it pays to its bank partners who issue American Express cards is neither in the public interest nor essential to ensure competitive neutrality. Extending interchange fee regulation to three-party or other smaller schemes would impair competition, innovation and efficiency in the payments system by enabling the already ubiquitous Visa and MasterCard networks to achieve even greater dominance. No public interest or benefit to merchants, in regulating American Express It is not in the public interest to subject American Express to interchange regulation in respect either of its proprietary issuing or its Global Network Services businesses.. When the RBA previously considered this same question in 20051, it found that: Regulation of these payments would have relatively little effect on merchant charges. Further, the existing incentives facing issuers of these cards could only be addressed through considerably more extensive regulation than that currently existing in the credit card schemes. In the Bankcard, MasterCard and Visa schemes, the interchange fee paid by the merchant's bank to the cardholder's bank has an important influence on the charge levied on the merchant by its bank. In contrast, in the American Express and Diners Club arrangements, the causation runs the other way. Merchant charges are determined largely independently of the payment to the partner banks: instead, the fees that merchants pay influence the size of the payments to the banks. Given this, regulating the payments that flow between American Express and Diners Club and their partners would be likely to have little effect on merchants' costs of accepting the cards. This is in contrast to the credit card schemes, where merchant service fees fell quickly following the reforms to interchange fees. We submit that nothing about the American Express business model has changed since that time to justify the RBA reversing its view. 1 RBA Media Release 2005-02 - http://www.rba.gov.au/media-releases/2005/mr-05-02.html Page 4 The position today remains unchanged: capping fees from American Express to its bank issuers will not reduce the merchant service fees that American Express charges to Australian merchants. Our merchant service fees are agreed independently with each merchant based on the value the merchant receives by accepting American Express. Uniform treatment of dominant and smaller, non-dominant firms creates neither a level playing field nor competitive neutrality Claims that American Express’ bank issuer relationships should be regulated to create a ‘level playing field’ are misleading. Visa and MasterCard already have the playing field tilted in their favour having achieved their current dominance over decades of extraordinary growth driven by price-fixing arrangements in the form of their multilateral interchange fees. The only effect of subjecting American Express to interchange regulation would be to reduce the attractiveness of the smallest card network to bank issuers, causing American Express to get smaller and the dominant schemes to get larger. This harms competition within the Australian payments system without need or justification. Finally, although competition is named in Section 8 of the Act as a desirable objective of regulation (alongside safety and efficiency), the overriding objective of the FSI Recommendations appears to be commoditising payments and eliminating value-added services and consumer choice. But the American Express model, which is less than a quarter the size of the dominant schemes, cannot compete as a commoditised product and holds its own in the market place solely as a result of its value-and-choice-based products and differentiated offerings. American Express’ business model is significantly different from Visa and MasterCard American Express’ business model is so significantly different from that of Visa and MasterCard that a ‘one size fits all’ regulatory approach is unwarranted. American Express does not have collectively-set multilateral interchange fees and its pricing is negotiated bilaterally and confidentially with its licensed issuers. This was the key reason that Visa & MasterCard were originally subjected to interchange regulation and American Express was not. The American Express business model also differs from the model of the dominant schemes in other material respects, as explained in the Appendix. Attempting to create common industry wide regulation across three and four party schemes that differ so fundamentally would create a significant additional regulatory burden that is not warranted in the absence of any clear public benefit. American Express lacks market power American Express is simply not a ‘must carry’ card. No consumer or merchant has to hold or accept American Express products and merchants frequently choose not to do so, which accounts for the lower coverage of American Express compared to the ubiquitous Visa and MasterCard. A merchant has little or no choice but to accept the cards of the dominant schemes, and thus they all do so. American Express cannot force any merchant to accept its terms. We routinely incur the risk that a merchant will decide not to accept American Express Cards at all, or to accept and then later decide Page 5 to surcharge our cardmembers, or to display our brand and then steer our cardmembers to use the products of Visa and MasterCard. We also face the risk that our cardmembers – under pressure from merchants – will opt to use the Visa or MasterCard card that the vast majority of them carry alongside their American Express cards. The same cannot be true of Visa